Get Ready for a Changing Regulatory Environment

Bank of America (NYSE:BAC) CEO Ken Lewis feels that the economy is bottoming out and the worst is likely behind us. Other business leaders report stabilization in their business as well with some tech CEOs even seeing an uptick in their businesses. The Feds also report seeing tentative signs of economic recovery and estimate that the economy will start showing more palpable recovery later this year. However, they think that the unemployment rate will likely touch 10%.

It is debatable whether the signs out there do point to a real economic recovery taking place. Calls for the bottom have been made many times during this recession (including Buffett’s call to Buy America) but so far they have been more of a miss. When the economy does indeed recover, the financial landscape in America (and possibly around the globe) will have changed.

Changing regulatory environment

Take for example the two fixtures in the financial regulatory setup, SEC and the Federal Reserve. Federal Reserve was created nearly 100 years ago in response to a financial crisis. It is a curious institution of sorts, as it is not really a government agency but more of a public-private hybrid institution, where private banks have a great say in how the Federal Reserve is run and who the office bearers are. This quasi-private institution is essentially in charge of some of the basic functions of a state: controlling the money supply and setting the interest rates (cost of credit). As such, there have been questions often asked about the relationship of the Fed with the private banks in the country and whether there are conflicts of interest that impair the Fed from making right decisions at all times.

The SEC on the other hand was established to oversee the proper functioning of the securities market in the US. For much too long, SEC has been too close to some of the entities they were supposed to be regulating resulting in much inaction and letting abusive market practices slide by unchecked.

The Obama administration now proposes to overhaul the regulatory structure in US by bringing disparate agencies and their functions together and consolidating regulatory powers in a unified agency. Additionally, the administration also wants to regulate mortgages and credit cards through this new agency (or a similar agency for consumer credit). Already, many credit card companies are up in arms saying new regulations on credit cards will make credit harder to get for an average consumer, even if the consumer sports an exemplary credit history.

While no fan of government regulations, I believe some is needed to avoid the country getting drunk on loose credit as it happened. Reduction in use of credit cards is not bad in my book and if it serves to help consumers rediscover the benefit of living below their means, that it is all good. I do not believe that the credit card industry has a god-given right to expand and grow at all costs. However, the government needs to take care not to extend their reach so deep that credit becomes scarce for legitimate businesses. The concept of risk taking and spirit of entrepreneurship needs to live on. If anything, the credit situation needs to be eased for businesses so new start-ups and entrepreneurial companies can get funds without having to tap into a founder’s personal credit card, which will probably become more difficult to do in the future.